Stubborn gasoline tax: Hard to raise, hard to reduce

Despite substantial electoral risk, Connecticut’s Legislature agreed this month to a budget that raises the sales tax, the personal income tax and taxes on alcohol, tobacco and hotels.

But there was one increase that legislators deemed too great a risk. They rejected Democratic Gov. Dan Malloy’s plan to increase the gasoline tax by 3 cents a gallon.

Sensitivity to raising gasoline taxes might come as no surprise. But cutting them can be problematic as well.

The New Hampshire House voted last month to suspend 5 cents of its gas tax for two months. The bill now seems to be dead. Both Democratic Gov. John Lynch and senators in the Republican majority said it would divert too much money from the state’s roads.

The situations in Connecticut and New Hampshire are a reasonable synopsis of where the politics of the gasoline tax stand today.
There’s increasing pressure to cut gasoline taxes because gas prices are rising.

At the same time, there’s increasing pressure to raise gasoline taxes because its revenues are stagnating as cars become more fuel-efficient. In most places, what that means is lawmakers won’t do anything at all.

In Pennsylvania, a special commission is looking at ways to pay for the growing cost of maintaining roads and bridges, but a gas tax is not on the table. The state gas tax has not been raised since 1997.

In many states, this inertia has existed for years.
In New Hampshire, for example, the tax has stood at 13 cents per gallon for the last 20 years. Those 13 cents are worth far less in real dollars than they were two decades ago. At some point, something has to give.

More states are starting to explore new ways to fund transportation that don’t count on the gas tax. What they’re finding, though, is that every possible solution comes with perils of its own.

New Hampshire isn’t the only state that’s talked about cutting its gas tax this year.
Lawmakers in Indiana and North Carolina have, too.

Even when adjusted for inflation, gas prices this April were at their highest point ever, except for a brief period in 2008. If prices at the pump continue to rise during the summer, the subject is likely to come up in more places.

So far, though, action appears a good bet only in Maine, where lawmakers might end the indexing law that automatically raises the gas tax in line with the rate of inflation.

There are several reasons it’s so hard to find states taking action. One is that their ongoing budget problems mean that any tax cut adds to the existing shortfall.

Then there’s the question of what a reduced gas tax really accomplishes. Lawmakers — and economists — often question the extent to which drivers actually receive the benefits of lower gas taxes as opposed to businesses keeping the difference for themselves, although one study of gas tax moratoriums in Illinois and Indiana a decade ago did show that most of the price reduction was passed on to consumers.

The biggest reason for the reluctance to cut gas taxes, though, is that while gas prices are at record levels, gas taxes are not. They don’t work like most other taxes. If the price of a pair of designer jeans goes from $50 to $100, the sales tax on it will double. If someone’s income goes from $50,000 to $100,000 in a state with a flat personal income tax, the state’s haul will double.

But gas taxes are typically applied on a per-gallon basis rather than as a percentage of the price. If gas goes from $2 a gallon to $4 a gallon, states don’t bring in any more money, except in the minority of states that index their gas tax to inflation or that apply a general sales tax to gas purchases.

Meanwhile, cars are becoming more fuel-efficient and high gas prices are helping limit how much people drive. The end result is dwindling receipts for a tax that is most states’ key source of transportation funding.

Last year, when New Jersey Republican Gov. Chris Christie abandoned a plan to build a train tunnel to Manhattan, it made national news.

Only months later did it become fully clear why the governor made the decision. Christie’s plan was to use the savings to bolster the state’s transportation trust fund, which is dependent on gas taxes, unchanged since 1988 — and which was set to run out of money for anything but debt service this year.

The problem will only get worse, in New Jersey and elsewhere. For example, a study in Washington state forecast that in 2025, drivers there would pay around 40 percent less in gas taxes, adjusted for inflation, than they did in 2009.

Such research suggests that the gas tax needs to be raised, not lowered.
But the politics of doing so are hard, especially when gas prices are at record highs.

“There is one tax the business community universally supports — the gas tax,” Maryland Democratic Gov. Martin O’Malley recently told The (Baltimore) Sun. “There is one tax the general public universally opposes — the gas tax.”

At the federal level, the normally tax-averse U.S. Chamber of Commerce supports a gas tax increase.
Yet the federal tax hasn’t been raised since 1993.

In Connecticut, legislative Democrats rejected Gov. Malloy’s gas tax increase even though the tax was cut by 14 cents a gallon in the late 1990s and early 2000s and even though the state’s transportation fund has struggled with deficits in recent years.

The state does have a second tax on gas that is indexed for inflation, but money from it often has been used to boost the general fund, not pay for transportation projects.

Lawmakers said they didn’t want to raise a tax that hits the poor the hardest.

They also likely were concerned about the electoral implications of increasing a tax that just about everyone has to pay.

Josh Goodman writes for Stateline.org, which is a project of The Pew Charitable Trusts.